Why you may want to get a loan for your business, even if you don’t need one

By Rishi Mehra

When Finance Minister Nirmala Sitharaman announced the economic package to help businesses tide over the impact of Covid-19, the most important announcement was the Rs 3-lakh crore automatic collateral free loan for small businesses.

There was, however, a catch. Only those businesses that had loan outstanding up to Rs 25 crore were eligible for it, which meant if you were a new borrower looking for a fresh loan, you would not be able to get it under the scheme. While one may argue about the rationality of the move, what is important to note is that the scheme places great importance on the existing relationship between a lender and a borrower.

The old adage has been to remain debt free and I have in my numerous articles highlighted the benefits of keeping debt as low as possible. However, there are times when conventional wisdom is turned on its head. There are times when debt or having a loan may actually be beneficial. This is because banks want to know about the borrower before they lend, especially in very tough economic conditions that we face currently.

Banks extend credit on the viability of your business and your ability to repay. If you have never borrowed, you will not have a credit history with the bank, which would explain a lenders’ reluctance to give money. As you borrow, your credit profile gets built up and so does the relationship with a bank. The trick is to borrow money when you may not need it and an amount that would not hurt you. Pay it back and build your credit profile as you go along. In fact, it would be very helpful if in the process you can get yourself a line of credit that you can utilize whenever you need it. A line of credit is when a bank or a lending institute parks a certain sum of money that you can dip into and you pay interest only on the amount you have withdrawn from it and only when you actually avail the offer.

These smaller short-term loans are also a great way to build a profile for a bigger loan, if you need it in the future. If you suddenly turn up at a bank with a request for a large loan, which may be to expand your business or fulfill a sudden large order, the chances are you will find it very difficult to get one. Build a relationship with your banker early so that he has confidence in you and in your business. In the end much of the lending decision also depends a lot on the equation you have with your bank.

At the end you may have the cash in your business to carry on operations or undertake that expansion, but as this pandemic has proven, there can be a complete shutdown of all activities suddenly. In such a case, having liquidity can also prove to be very handy. In the end, it is a tough choice, but what is clear is that every business would need careful planning about how they operate. Much of what I have said can only be worked upon on the other side of the pandemic, but once there, it may be prudent to build a credit for the future.

The writer is the CEO, Wishfin.com

Why you may want to get a loan for your business, even if you don’t need one Why you may want to get a loan for your business, even if you don’t need one Reviewed by TechCO on 8/15/2020 Rating: 5

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